How to Decide Which Debts to Pay Off First

When money is tight and you have multiple debts to manage, it can be tempting to divide whatever you have equally between all of them and hope for the best. This approach rarely produces the best outcome. Debts carry different levels of risk and different costs, and the order in which you prioritise them should reflect that rather than treating all debts as equivalent.

Priority debts come first, always

Some debts carry more serious consequences for non-payment than others and should always be addressed before credit cards, loans, or other unsecured debts. These are known as priority debts: rent or mortgage arrears, council tax, energy arrears, TV licence, and any court-ordered payments. Falling behind on these can result in losing your home, having your energy supply cut off, or court action. Credit card and personal loan debts carry none of these immediate consequences — they affect your credit record and may result in collection activity, but not the same acute risks.

After priority debts: the interest-rate argument

Once your priority debts are under control, the mathematically optimal approach to unsecured debts is to focus additional payments on the one with the highest interest rate while maintaining minimum payments on all others. This is sometimes called the avalanche method. It minimises the total interest you pay over time and means you clear the overall debt in the shortest period. A credit card charging 30 per cent APR costs significantly more to carry than a personal loan at 8 per cent — paying the card down first limits the damage.

The case for the snowball method

An alternative approach is to focus on clearing the smallest balance first, regardless of interest rate. This is the snowball method. It costs more in interest over time than the avalanche approach, but it produces earlier wins — clearing a debt in full and freeing up that minimum payment for the next one. For people who find the motivation to keep going difficult when debts all feel large and far from being cleared, the psychological momentum of the snowball method can make it more effective in practice even if it is less efficient in theory.

When the numbers are very difficult

If your total debt feels unmanageable after covering your essential costs, the priority-and-interest ordering above may not be the most urgent thing to think about. If you are unable to maintain even minimum payments, speaking with a free debt adviser is the most useful next step. They can look at all your debts and income together, assess which formal or informal solutions might apply to your situation, and help you put together a plan that reflects reality rather than what you feel you should be able to manage.